What is the lowest possible realized return of the industry

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The industries owns assets that will have a(n) 85% probability of having a market value of $55 million in one year. There is a 15% chance that the assets will be worth only $25 million. The current risk-free rate is 3%, and the industry's assets have a cost of capital of 6%. The current market value of the unlettered equity is $ 47.642.

Question a) Suppose instead that the industry has debt with a face value of $25 million due in one year. According to M&M, what is the value of the industry's equity in this case?

Question b) What is the expected return of the industry's equity without leverage? What is the expected return of the industry's equity with leverage?

Question c) What is the lowest possible realized return of the industry's equity with and without leverage?

Reference no: EM132487748

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